American Campus Communities, Inc.
Q3 2016 Earnings Call Transcript

Published: 25 Oct 2016

[Operator:]

Welcome to the American Campus Communities Incorporated 2016 Third Quarter Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded and I would now like to turn the conference over to Ryan Dennison, Vice President of Corporate Finance and Investor Relations for American Campus Communities. Please go ahead.

[Ryan Dennison:]

Thank you. Good morning and thank you for joining the American Campus Communities 2016 third quarter conference call. The press release was furnished on form 8-K to provide access to the widest possible audience. In the release the Company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg G requirements. If you do not have a copy of the release, it's available on the Company's website at americancampus.com in the Investor Relations section under press releases. Also posted on the Company website in the Investor Relations section you will find a supplemental financial package. We're hosting a live webcast for today's call which you can access on the website with the replay available for one month. Our supplemental analyst package and our webcast presentation are one and the same. Webcast slides may be advanced by you to facilitate following along. Management will be making forward-looking statements today as referenced in the disclosure and the press release, in the supplemental financial package and in SEC filings. Management would like to inform you that certain statements made during this conference call which are not historical fact may be deemed forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities and Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in any forward-looking statement are based on reasonable assumptions, they are subject to economic risks and uncertainties. The Company can provide no assurance that its expectations will be achieved and actual results may vary. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time to time in the Company's periodic filings with the SEC. The Company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said that, I would now like to introduce the members of Senior Management joining us for the call, Bill Bayless, our Chief Executive Officer; Jim Hopke, our Chief Operating Officer; William Talbot, our Chief Investment Officer; Jon Graf, our Chief Financial Officer; Jamie Wilhelm, our EVP of Public-Private Partnerships; and Daniel Perry, our EVP of Corporate Finance and Capital Markets. With that, I'll now turn the call over to Bill for his opening remarks. Bill?

[Bill Bayless:]

Thank you, Ryan. Good morning and thank you all for joining us as we discuss our third quarter 2016 financial and operating results. The quarter was highlighted by the delivery of seven high quality core pedestrian assets, continued net asset value creation via strong core performance in our same-store properties, industry-leading leasing results with regard to the 2016/2017 academic year and significant progress in our capital recycling activities, with 19 properties now under contract for sale and expected to close in Q4, with proceeds earmarked for reinvestment in our highly accretive development pipeline. In addition, we purchased two core pedestrian assets in existing ACC markets which offer meaningful upside and NOI growth which were match funded via our ATM, further preserving our capacity for our expanding development pipeline. Beyond American Campus' strong performance, Axiometrics reports solid industry fundamentals nationally, especially with regard to core pedestrian assets located within a 1/2 mile of their respective campuses, showing an increase in occupancy from 95.9% to 96.4%, with rental rate growth coming in at 2.2. In addition, Axiometrics reports that it expects new supply nationally to once again decrease for fall 2017, with that decrease ranging from 2% to 16% based on actual construction starts. With that, I'll turn it over to Jim Hopke, our Chief Operating Officer, to provide more color on our operational results.

[Jim Hopke:]

Thanks, Bill. It was a strong quarter operationally, with 2016 same-store NOI increasing by 5% on the combination of a 3.9% increase in revenue and a 3% increase in operating expenses. As you will see on page 5 of the supplemental, same store revenue increased by 3.9% over third quarter of 2015. That increase is further broken down to a 3.1% rental revenue increase and an 11.1% increase in other income. The other income increases were due in large part to strong summer camp and conference business at our residence hall projects, increases in utility reimbursements and outperformance in application and admin fees in several markets with strong early 2017/2018 leasing demand. The application and admin fees were budgeted in the fourth quarter which will result in some Q4 other income underperformance relative to the fourth quarter of 2015. We're very pleased with our year-to-date same store operating results which reflect increases of 3.3% in revenue, 2.6% in expenses and 3.9% in NOI growth compared to the first three quarters of 2015. Quarterly and year-to-date operating expense detail is highlighted on page 6. In total, expense growth for the quarter and year-to-date continues to remain within our targeted ranges. Variances of note are as follows; property taxes increased due to aggressive assessments in several markets, primarily in Texas. We're projecting property tax growth for the full year to be in the 5% to 7% range. Utilities expenses for the quarter were driven higher by a few extraordinary items, but for the year improved commodities pricing, LED lighting upgrades and rate negotiations in deregulated energy markets continued to drive utilities expenses below inflationary growth. Repairs and maintenance expenses declined by 4.1% for the quarter and decreased almost 1% year to date, primarily related to maintaining turn expenses at 2015 levels and one-time occurrences at three properties during the third quarter of 2015. We expect inflationary repairs and maintenance expense growth in the fourth quarter. Marketing spend increases moderated in the quarter as expected. We're projecting annual spend to be in the area of $135 per bed for the full year. We remain focused on continued margin improvement and are approaching our goal of 55% by continuing to take advantage of longer term initiatives, including multi-property market efficiencies, broad utility initiatives, efficiencies created through systems advancement and refinement of our portfolio quality. Occupancy at our same-store wholly owned properties was an industry leading 97.4% as of September 30, 2016, 40 basis points above our 930 2015 occupancy, with a 3.5% rental rate growth. Our seven 2016 developments were delivered on time with occupancy of 97.4% when excluding the Merwick Stanworth Phase II asset at Princeton which is expected to stabilize during the first academic year consistent with the first phase. I would like to thank our leasing, marketing and operations team for another strong lease up, delivering opening fall 2016 rental revenue growth of 3.9% which exceeded our long term average of 3.4% and is the highest level generated since the 2010/2011 academic year. As always, our ability to maintain that revenue growth through the 2016/2017 academic year will be highly dependent on our ability to backfill December and May ending leases. It is also important to note that our ten-month leased residence halls were a material contributor to our increased rental revenue growth and could lead to an increase in the level of seasonality we experience in the summer of 2017. Our initial 2016 guidance for same store NOI growth was in the range of 2% to 3.8% for the full year. And we now expect 2016 same store NOI growth to be between 3.3% and 3.6% for the year, at the upper end of the initial range. With that, I will turn the call over to William to discuss our investment activity.

[William Talbot:]

Thanks Jim. Focusing first on dispositions, we have made great progress on the sale of 19 non-core assets totaling 12,083 beds. The portfolio is under contract to a single buyer for gross sales proceeds of $508 million and the buyer has completed all physical diligence. The sale is subject to a financing contingency and normal closing conditions. The buyer is in the process of acquiring the necessary loan commitments and we're targeting to close the sale during the month of November. The assets being sold average 1.6 miles from campus and 16 years old. The sales price represents a 6.1% economic cap rate on in-place revenue, escalated trailing 12 expenses and historical capital expenditures. Our portfolio quality will be greatly improved following the completion of the sale, with our remaining portfolio including only two assets located outside of a mile from campus and our portfolio median distance to campus will be reduced to 0.1 miles. In total, this portfolio sale, along with the sale of two non-core properties completed during the first quarter of 2016, total approximately $582 million and we continue to market two additional non-core assets for sale with a potential closing occurring in early 2017. The proceeds from the sale of all these assets will be recycled into our highly accretive development pipeline. Looking at our own development pipeline for fall 2017, we're under construction on ten developments totaling 7,454 beds and $603 million in development cost. And although we have just kicked off the leasing efforts for those communities, two developments have already made significant leasing progress. SkyView at Northern Arizona University is already 83% applied and U Club at Turner at the University of Missouri in Columbia is 47% pre-applied. Moving to our own development pipeline for 2018 and beyond, during the quarter we broke ground on our $96 million ACE development on the campus of Virginia Commonwealth University and subsequent to quarter end we broke ground on a $39 million second ACE development on the campus of Butler University. In addition, we anticipate breaking ground on our ACE project on the campus of the University of California Berkeley during the fourth quarter of this year. All three developments are targeting a fall 2018 delivery. In total, our own development pipeline for 2017 through 2019 currently totals 16 projects, over 13,000 beds and an excess of $1 billion of development cost, consisting entirely of core Class A communities that are either located on or walking distance to their respective campuses. We're targeting between a 6.5% and a 7% collective stabilized nominal yield for these developments. Turning now to the transaction market, in a recent market update call, HFF noted transaction volume for this sector of $8.3 billion over the past 12 months, up 61% from the previous 12 months. The increase in transaction volume is driven primarily by portfolio sales and new and continued interest from well-known institutional investors. With regards to our acquisitions, we currently acquired two core pedestrian assets at Syracuse University and the University of North Carolina Charlotte, totaling 709 beds for $63.1 million. Both assets are extremely well located in their markets, averaging less than 1/10 of a mile from core campus. While these acquisitions are expected to yield a collective 5.2% nominal and 4.9% economic cap rate in the first year, they offer substantial upside and we expect to achieve stabilized cap rates of 6.8% nominal and 6.4% economic by the third year of ownership. Both assets are expanding our presence in target markets and are located within blocks of other existing American Campus communities, offering the potential for additional outsized returns through multi-asset efficiencies in payroll, marketing and other areas. These acquisitions were 100% match funded through our ATM program during the quarter, maintaining capacity for our highly accretive development pipeline. We will continue to review select core pedestrian opportunities that meet our investment criteria and offer potential upside with regards to improved revenue and operations, management upside and/or efficiencies through existing market expansion. Finally, we continue to see strong interest from colleges and universities to utilize P3 structures to meet their housing needs. The pipeline of both ACE and third-party opportunities of colleges and universities remains vibrant. With regard to our third-party developments, we're under construction on three developments at Oregon State University Cascades, Texas A&M Corpus Christi and Texas A&M San Antonio and are pleased to announce that we have been awarded the right to begin predevelopment services for a proposed third-party development on the campus of Northern Kentucky University. With regards to our third-party consulting agreement related to the acquisition of an asset at Texas A&M Corpus Christi, the sale between the parties has been delayed and we now anticipate the transaction would close either late fourth quarter of 2016 or first quarter 2017. With that, I will now turn it over to Jon to discuss our financial results.

[Jon Graf:]

Thanks, William. For the third quarter of 2016 we reported FFOM of $60.4 million or $0.45 per fully diluted share, as compared to FFOM of $48.7 million or $0.43 per fully diluted share for the comparable quarter in 2015. FFOM increased by $11.7 million or 24%, but per share amounts were impacted by a 16% increase in the weighted average shares outstanding, primarily from the $17.9 million common share offering during February of 2016 to fund our development pipeline. As compared to the third quarter of 2015, the 2016 third quarter results benefited from the previously discussed same store operating results and the 19 growth properties placed into service since the first quarter of 2015 which was slightly offset by lost property NOI from two non-core property dispositions in early 2016. FFOM for the third quarter of 2016 includes about $0.04 from the 19 properties classified as held for sale at quarter end. It should be noted that the third quarter is historically seasonal in nature as compared with the other quarters, as we experienced the impact of higher operating costs associated with the annual turn. As of September 30, 2016, the Company's debt to total asset value was 34% and the net debt to run rate EBITDA was 5.8 times. Upon the sale of the non-core properties that William discussed, these future ratios are anticipated to be approximately 32.3% and 5.2 times. As of the end of the third quarter, we had $32 million of cash available and $480 million available under our revolving credit facility. These funds, along with those anticipated from future property dispositions and cash flow from operations, position us to execute on our development pipeline while maintaining strong credit ratios and a healthy balance sheet. As of quarter end, we had approximately $5.5 billion in unencumbered asset value which was almost 77% of the Company's total asset value. Less than 1% of our total indebtedness as of quarter end was floating rate debt. Taking into consideration our final 2016/2017 lease up, the financial results achieved through the third quarter of FY16 and remaining anticipated dispositions for the year, we're tightening our 2016 FFOM guidance range to $2.23 to $2.27 per fully diluted share. We're increasing our previous low end of FFOM guidance of $2.19 by $0.04. Approximately $0.02 reflects moving the timing on the closing of the disposition portfolio from October 1 to October 31. The low end of guidance is also being increased by an additional $0.02 to reflect the results of the lease up for fall 2016 and property operating performance to date. The previous high end of FFOM guidance of $2.31 is being decreased by $0.04, approximately $0.03 reflects an increase in the amount of the remaining 2016 dispositions from $126 million to $508 million. The high end of guidance is also being decreased by approximately $0.02 to reflect the results of the fall 2016 lease up, with a $0.01 offset from improvements and other components of guidance. More detail on the assumptions utilized and our current FFOM range are disclosed on pages 16 and 17 of our third quarter supplemental. With that, I'll turn it back to Bill.

[Bill Bayless:]

Thank you, Jon. In closing, I'd like to address the ACC team and thank them for their hard work and dedication and the exceptional operational, financial and leasing results that they continue to deliver. As we move into 2017, you have set the stage for the Company's 13th consecutive year of same-store growth in rental rate, rental revenue and net operating income. It is your collective efforts that have made American Campus the industry's best-in-class company. With that, we'll open it up for Q&A.

[Operator:]

[Operator Instructions]. And our first question comes from Jordan Sadler with KeyBanc. Please go ahead.

[Austin Wurschmidt:]

It's Austin Wurschmidt here with Jordan. Bill, with regard to the 3.9% rental revenue growth that's locked in now through call it August of next year, how are you thinking about same-store NOI growth versus that historical range of 4% to 6% that you have spoken to previously?

[Bill Bayless:]

Yes and as we talked about coming into this year, certainly taking care of the top line in that regard gives us an excellent opportunity to be in the higher end of that range and more in the 4% to 6% portion of it. And so we're excited about the top end, as Jim said in his script and each and every year we've got to execute and make sure that we backfill any short term leases that are in place in your interim periods, but certainly the first step is one that we're very pleased with in that regard.

[Austin Wurschmidt:]

And then also appreciate the color on the early indications for 2017/2018 target revenue growth. Can you just provide a little bit of detail of how you came about that range and what could get you maybe towards the high end of the range?

[Bill Bayless:]

Sure. When you look at the 2.7% or the 4.2% which we talk about as rental revenue growth for the upcoming academic year that we're just commencing that lease up on, obviously on the total portfolio we're starting about 30 bps ahead of where we started last year. The total portfolio was at 97.1% versus the 96.8% the year before. So it's pretty consistent growth with what we were looking at moving into this year, when you look at the 30 bps improvement in terms of the starting point. So as always we'll attempt to do a combination of rate and occupancy. We have set most of our rates for the year. We're in the final stages, but we have talked about you all historically, think about that 3% average ongoing. We talked about 3% going in last year and we ended up much better at the 3.5%, given the velocity and the way that the lease turned out. We're looking at the historical breakdown there as it relates to rate and occupancy gains and think that within that range we'll be comfortable. And certainly what will get us toward the higher end of that range is benefiting from if we have an earlier velocity seizing where we can replicate what we did this year and being able to actually push rates throughout the process that more than counteracted any of the decreases that typically take place later in the cycle.

[Austin Wurschmidt:]

And then just one last for me. I know that P3s have taken hold and momentum here has been really strong, but was curious if you had any thoughts on how universities are viewing the product these days and perhaps the rating agency's latest views on the A structure?

[Bill Bayless:]

Yes, only positive in that regard. First, when you look at the rating agency viewpoints, last year we actually had a real positive in that when the credit agencies actually reviewed ASU, they had positive indications of the privatized housing that they had done toward the university's own credit profile. That was a very positive step with regard to that write up being put out there for universities to see the impact on a program that we started with them in 2008. So it has the most longevity in the industry in terms of being able to be evaluated. We only continue to see acceleration in that regard. Privatization of a whole which is both combined of equity transactions such as ACE for us and the ONEPlan for EdR, coupled with the third-party delivery program, both are accelerating. When we look at the velocity at this point in time, there's over 20 to 30 -- between 20 and 30 universities that were either in direct negotiation and/or active procuring of pursuits with and so it continues to be very consistent in terms of the level of demand. And again, the one thing that we have been saying for the last two years and we do credit our partners at ASU and Michael Crow for his vision and entrepreneurship, is that it has become mainstream with very prominent flagship universities and university systems looking at the P3 model as the preferred method of delivery.

[Operator:]

Our next question is from Nick Joseph with Citigroup. Please go ahead.

[Nick Joseph:]

Bill, you mentioned national supply coming down next year. What are you expecting for supply in your markets and if you can focus on supply closer to campus, given your proximity to campus?

[Bill Bayless:]

Yes, absolutely. And a little bit of -- this will be a transitionary answer for you on this call because I want to address that we're going to be changing the market mix that we're in with the disposition of the 19 properties. And then on the last call, Nick, we talked about in our markets that we expected supply to be up from 7% to down 20%. And with the addition of Oklahoma and Clemson now coming into our portfolio, both through development activities and then also the anticipated exit in Q4 of the 10 dispos, we'll be going from the 71 markets plus 2 to 73, minus 8 down to 65 markets. So I'm going to give you the stats. This will be the first time we have looked at specifically what the go forward market base is there. And the number is a little higher, but it's also worthy of explanation in that we're what's driving that number higher. In our 65 markets going forward after the dispo, there will be an uptick in new supply of what is already under construction up to 21%. Now, we're 20% of the new supply coming into those markets where last year we were 5.9% of the new supply coming into the markets. And so we're driving that significant increase. When you exclude the products that we're delivering in the marketplace, the competitive supply is up 4%. And so very manageable. Another thing that we're tracking, when you look at that supply number, that new number for 2017 is an increase or a total new supply of 24,652. Last year that number was 20,308. And one thing we would point out on the 2016 supply, with 78% of the universities that make up the universe there of that 20,000 beds, enrollment was up 22,400. So enrollment actually outpaced new supply by 2,000 beds. And that's with only 78% of the schools reporting, so we expect it to go up. So in that regard, we see the new supply in our markets being very manageable. We see enrollment over the last several years more than keeping pace with that new supply and the reason you see that number uptick is directly correlated to American Campus' success in assemblage of sites and entitlement processes and getting these core pedestrian predevelopment activities done successfully.

[Nick Joseph:]

And how would you characterize that supply up 4%, excluding ACC in terms of proximity to campus? Is everyone following your lead and trying to build as close to campus or is it more spread out and maybe less competition for you?

[Bill Bayless:]

There is definitely a move closer to campus. We do still see a smattering, I would say less than 20% of transactions that are largely people still building cottage products a little further from campus, but the large majority is now taking place what we would say is pedestrian and/or bicycle. In that regard and probably one of the best case studies that we'll talk about in the years to come, where we have seen the most prolific development is actually at Texas A&M University in College Station which is a great example of a rural land grant institution and where you don't have some of the more dynamic metro supply that you have seen. And we talk about Austin as a case study. At A&M where there has been an excess of 10,000 beds delivered over the last four years, our core pedestrian assets there are over 98% occupied. It demonstrates again, it's all about choosing the proper locations to where when the supply comes in they're not building in front of you. And so especially with the disposition activities that we're undertaking, we feel very good with the core portfolio going forward in that even as new supply is added, core pedestrian to campus, that we're well positioned. The other large stat that we would point out is, when you and I apologize I have this stat for the total 73 markets that we're in, we'll dissect this further before NAREIT for you to talk specifically about the 65, but when you look at the 73 markets that we're currently located in and you look at the percent of purpose-built supply as a percent of enrollment, that number is only 11% of pedestrian beds to the enrollment base. And so while you see a focus on that category that has averaged about 1.2% of new supply coming in as a percent of enrollment, it's only at 11% currently. So we're still very early on in the modernization and where you have seen the most prolific development, in for example A&M and Tallahassee, you have seen our performance excel as those interior submarkets mature.

[Nick Joseph:]

And then for the 2016 deliveries, it looks like they came in at about 2% over budget. So what drove that and then can you talk about the expected stabilized yield for the 2016 developments?

[Bill Bayless:]

Yes and we're about 2% over the originally initiated -- or originally released development cost, largely driven, I think the largest increase was at Boulder where the large majority of that was owner decisions in terms of material specs and upgrades on long term asset management decisions. So we do not see the slight uptick in development costs being in any way, shape or form a diminishment on stabilized targeted yields of that north of 6.5%.

[Operator:]

Our next question is from Drew Babin with Robert W. Baird. Please go ahead.

[Drew Babin:]

I was hoping you could go into a little more detail on the potential opportunities set for private developer quote misses that occurred in the third quarter. Syracuse, that acquisition kind of being one example. How deep is that pool of potential opportunities?

[Bill Bayless:]

From year to year it varies and certainly with more people getting into the sector and more development taking place, in follow up to Nick's question being closer to campus which are usually a little more complex from construction methodologies and things of that nature, I would say over the last three to five years we have seen more misses and that's good and it's bad. One, it does create opportunities like -- that provide some of the acquisition upside that you have seen in the two acquisitions that we have made. It also can have a negative impact short term in the market when you're bringing in a new asset and people are jaded if the company that missed didn't properly handle that. It's a double edged sword. The positive certainly you're seeing in terms of the acquisitions that we're undertaking that are fantastic opportunities for us, especially in markets that we're already in, where we see these things occurring, where we have intimate market data in terms of what the upside is and pricing strategies and things of that nature. And simultaneously, we pay great attention to it because it creates when you're going into a new market the need to really differentiate your under construction development delivery marketing activities to assure the market that you're going to make it.

[Drew Babin:]

And one follow-up question on Merwick Stanworth at Princeton, can you talk at all about the opening occupancy? Obviously the opening occupancy is probably close to zero, but where that stands today and the timetable for stabilizing that?

[Bill Bayless:]

Yes and in this case as we talked about, completely different product in that it is faculty staff housing that really comes online much more like a traditional multifamily product with rolling occupancy. As of this moment in time it is 48% and we would expect it to fully stabilize over the next six to nine months.

[Drew Babin:]

Okay. And one last question, anecdotally, if you look back on your 2017 pipeline as it stood about a year ago, it looked like there were about $177 million or so projects under development at that time. Obviously that ballooned quite a bit since then. How do you feel about potential 2018 deliveries relative to how you felt a year ago in terms of 2017?

[Bill Bayless:]

And 2018 certainly we're still early on in the equation and so, well, let me back up and start by 2017. 2017 obviously represents what is the largest year in the Company's history in terms of owned development deliveries. And so while we delivered -- actually in 2012 we delivered 16 assets, what this really shows is that in 2012 when we delivered 16 products, a lot of our university clients were choosing non-equity structures. So part of the uptick in that increase that you see in 2017 is more schools choosing the equity model and ACE as the delivery methodology. With that said, I think that 2018 certainly has the potential in that we still have another solid nine months of ability to add pipeline deals to that both off campus of transactions we're trying and attempting to go through the entitlement process and the predevelopment activities, as well as potential ACE transactions that are in the hopper and direct negotiation of that matter. Whether or not we're able to bring the 2018 pipeline back up to that 2017 level is certainly to be seen in that 2017 year is turning out to be a bell weather development pipeline for the Company at this point in time. So certainly upside, whether or not it gets to that level, to be seen.

[Operator:]

Our next question is from Jeff Spector with Bank of America.

[Juan Sanabria:]

This is Juan Sanabria with Jeff Spector. I was just hoping you could talk a little bit about your margin expectations. You talked about that 55% target, what the drivers are to get there. Is it more penetration in key markets like the Syracuse acquisition you did this quarter or what do you think gets you there at the end of the day and if you could give any sense of timing?

[Daniel Perry:]

Sure. Juan, this is Daniel. As we have talked about historically, certainly our asset management platform and the cost containment efforts that we have through that have been a big driver of the progress we have made to date. We continue to expect to make progress in certain areas there. We have talked about recently our efforts with regards to multi-asset market efficiencies which we see in both payroll, marketing and repairs and maintenance. We see efficiencies there. Obviously also as we bring online and the development pipeline which tends to have a higher margin, that will be an additional benefit to help us get there. From a timing perspective, I think it's been a year or so ago that we said we thought it would be within two to four years. Right now, as you can see for the total portfolio, as of the end of this quarter we're at 54.7%. We're getting pretty close and we think it's something certainly we're on track to get to that 55%, potentially eclipse it in the near future.

[Juan Sanabria:]

And how are you thinking about acquisitions versus developments? Were these two acquisitions one-off opportunities and the focus still is first and foremost on developments or how should we think about that and maybe funding as well?

[Bill Bayless:]

Yes and if you go back to what we have been talking about the last several quarters from a capital allocation perspective is that nothing at this point in time is more accretive than the development pipeline that we're bringing on place. And so in that regard, that is our focus in terms of the highest and best use of the capacity that we have. However, as we talked about when we see the acquisition opportunities that have outsized performance, especially in existing markets where we're already operating and have that additional comfort in terms of knowledge and due diligence and the ability to execute on creating that value, we're going to undertake that. And as we talked about in this case, we're able to completely match fund that via the ATM, preserving that capacity for development. And so we continue to be focused, priority number one on development. We will continue to look at acquisitions on a one-off basis and when the opportunities exist to produce upside and match fund and preserving that capacity, we'll undertake it. And if such time there's a larger acquisition or M&A opportunities that arise, we'll do what we have always done if it makes sense for us and come tell the market the story and talk about that together. So at this point in time it's still very focused on the course that we have set over the last 18 months in developments first and foremost and acquisitions when they make sense.

[Juan Sanabria:]

And just lastly on the dispositions, I know there's a couple of assets that are remaining to sell early in 2017, but is there anything else that we should think of as part of an annual calling of the bottom portion of the portfolio or anything like that to help fund the developments longer term or to clean up the portfolio further?

[Bill Bayless:]

Yes, absolutely. And that in addition to finishing the disposition of the non-core assets, we do expect to continue to be a capital recycler, always looking at the bottom 1% to 3% of your future performance and attempting to predict when that's going to occur and harvest value. I would say that it will come in two fronts, one will be situations where based on agers, again, further proximity to campus, between they may be bicycle properties, things of that nature, but we'll look at refining and honing in. The other thing that you have seen us do in markets like ASU and Tallahassee is in markets where we have a presence as we do a good job in harvesting and maximizing value, is trading assets and reinvesting in the same markets. And so on an ongoing basis, those are things that we will continue to do as part of that long term capital recycling activity. Again, benchmarking those funds first and the highest priority to go back in the development pipeline that are typically either on campus or right across the street.

[Operator:]

Our next question is from David Corak with FBR Capital Markets.

[David Corak:]

I apologize if I missed this. Sticking with the disposition theme, can you just reconcile how the $508 million figure on the dispo relates back to the $526 million I think it was that was in there at the low end of guidance? And then the 6.1% cap rate on that, how does that stack up against the pricing that you were originally anticipating?

[Daniel Perry:]

Sure. David, this is Daniel. Remember at the beginning of the year we talked about that we wanted to dispose of a significant portion of our non-core assets and we said that in terms of our target for the year we were looking at about $600 million. Obviously we were looking at a selection of potential assets in the non-core group that we could sell. And so it wasn't that we were setting out with a specific group that was making up that $600 million. We wanted to put together a portfolio that we thought would transact well and so we worked through that throughout the year. Remember we sold $74 million and two assets early in 2016. So the $526 million was really just the difference between the $600 million and that $74 million that we had already sold. Not that we were tieing a specific valuation to a specific group of assets. So we feel good about the 19 we have been able to put together for the current disposition and the $508 million valuation we got on those. As you see on the sources and uses page, we lay out $508 million to $530 million of potential dispositions which at the $530 million would include the two additional assets that we're currently marketing and expect to potentially transact on in early 2017. In terms of the cap rate, the economic cap rate of 6.1% that we achieved is very much in line with our expectations. We're very happy with that and on a nominal basis that was in the mid-6%s which again was in line with our expectations going into the process.

[David Corak:]

And then in terms of management, the management fees, are you going to be managing this -- what should we expect for fees in 2017/2018 going forward?

[Daniel Perry:]

Yes, so we're going to be transitioning management with the buyer to a new third-party manager. They're going to take on -- their new third-party manager is going to take on all but 11 of the assets and then we will phase those to the new manager over the coming months into early 2017. Based on the timing, it's about $140,000 a month in management fees that we would make on the 11. I would say you should expect about $350,000 in management fees in 2017, first part of 2017 before we completely roll those over to the new manager.

[Operator:]

Our next question comes from Alex Goldfarb with Sandler O'Neill. Please go ahead.

[Alex Goldfarb:]

Just a few quick questions here. First, you mentioned that the sale is contingent on financing. So just one, a little bit more color. Is this a highly levered deal or is this something with mortgage sign-offs where maybe the existing mortgage holder has to approve of the buyer? If you could just give a little bit more color as to any potential hiccups in the contingents.

[Daniel Perry:]

Yes, so like any sale they're going out and financing the assets with new debt. We will be prepaying the loans, the $197 million of debt that's currently outstanding on the portfolio and they're putting new loans in place. They're halfway through the process of getting all their loan approvals and expect the rest of it to come within the coming weeks and very much still expect to be online with our targeted date that we laid out and guidance in November.

[Alex Goldfarb:]

But is this something, Daniel, where are they looking for a highly levered transaction where there's risk?

[Daniel Perry:]

No, they're using the GSEs and very much in line with what they do in the 70%, 75% range.

[Alex Goldfarb:]

And then early on in the MDNA, you talked about -- it sounded like you said there's a bigger move towards the ten-month leasing in the portfolio versus the historic level. So if you could just provide a little bit more color on that and how much more volatility that could add if it is a larger percent of the portfolio, how much more volatility it could add in the next few years.

[Bill Bayless:]

Yes and Alex, this is something that you will see and it's not a situation where you see more ten-month leases at 12-month properties. That is pretty consistent from year to year with what we have seen. What we're referring to here is really directly related to ACE. And if you look at the ACE awards about 50% to 70% of those on an emerging trend are first-year residence hall products. And so by design and by pro forma those properties operate on an academic year fall and spring versus the apartments off campus which operate on a 12-month basis. And so we're seeing a higher percentage of our revenue come from those residence hall properties where by design you're getting the full-year investment in that ten-month period. And that's where Jim's comment is that is what you will see a little variation, seasonality in growth rates as those May ending lease which again are not short term leases on a 12-month property, but rather by design that product type how they lease. And so my guess would be over time as we see more ACE transactions coming into the pipeline and remember a large majority of ACE is replacing the 1940 and 1950 residence halls products on these campuses, you'll see that become a larger portion of the portfolio.

[Alex Goldfarb:]

Okay, but are you presumably when you provide guidance if this is a material part of 2017, you'll update so that we can better gauge the seasonality or you're saying that, Bill, in a number of years we'll see the impact but in 2017 we're not going to yet see the impact because it's not meaningful enough?

[Bill Bayless:]

No, in 2017 it will probably be 30 to 40 basis points post May when you see those residence halls move off, just in terms of same-store comparison numbers.

[Daniel Perry:]

And remember Alex, that you always noted that those summer months are mixed between Q2 and Q3. And so it gets mixed with the normal part of the academic year, the spring semester and then the fall semester in Q3. So you don't see the full impact in any one quarter, but to the extent it is a little bit noticeable, we wanted to make sure that people understand with a little bit more of those residence hall style beds coming in through the ACE program that if we're seeing some of that seasonality you understood what was going on.

[Bill Bayless:]

And so the biggest impact -- again, it's not an economic in that you're achieving the full yield in that academic year on those assets by design, but you will see the annualized occupancy over time as that portion -- and also by the way eliminating the 19 sale properties which were all 12-month off campus, just by virtue of the dispo is also you have a higher percentage of those assets that are in the portfolio. So just something that we want to point out and make folks aware of and we certainly will continue to talk about that over time as it becomes a larger segment of our portfolio.

[Operator:]

Our next question comes from Jeff Pehl with Goldman Sachs. Please go ahead.

[Jeff Pehl:]

Just looking at the footnote 1 on page 17 of the supplement, your NOI guidance range of 3.3% to 3.6% excludes the 19 properties that were in your 2Q guidance. What would your 2016 same-store guidance have been if these 19 properties were included the same they were in 2Q?

[Daniel Perry:]

I think maybe in the lower end of that, 3% to 3.3%. It's very much -- even with the dispos in it would be very much within the midpoint of our original guidance range for the year which was 2% to 3.8%. So of course as you would expect we have a slight improvement in the NOI guidance -- or same-store NOI expectations when you're looking at just the core assets given the improved rental rate increase at those assets.

[Jeff Pehl:]

So it would be at the midpoint about 2.9% or maybe the low 3%?

[Daniel Perry:]

Probably low 3% because we have had a little bit of outperformance to date. So a little above the midpoint.

[Operator:]

Our next question comes from Ryan Meliker with Canaccord Genuity. Please go ahead.

[Ryan Meliker:]

I just had a couple of follow ups. First of all, I think it was with regards to Austin's question earlier on, you talked about public-private partnerships. Bill, you especially mentioned university systems. We've heard rumblings that the University of California system is looking at doing something pretty material. Can you give us any color on what you've heard regarding that?

[Bill Bayless:]

Yes, they're certainly one of the systems that are looking at privatizations as one of the main methods of delivery. And at the system level they are drawing out some guidelines in terms of how they want to go about it as a system, what type of deals they want to do. Obviously we have an excellent rapport with the University of California system in that UC Irvine has been our largest third-party client for more than a decade, where we've done about $0.5 billion of development on that campus. Also we have the ACE transaction at Cal Berkeley that is under way. And so certainly as that system looks at the success that has been taking place with P3s by individual collages, they've recognized that it's probably a method that could be utilized throughout the system and are looking at broader initiatives of how to approach it. And so certainly something that we're well aware of in that we already do business within that system and would earmark it as a place that there's great future opportunity.

[Ryan Meliker:]

And can you just give us an update on how far along you are with any individual RFP processes, whether you'd expect anything to be announced in the next couple of quarters. How many projects are you working on right now?

[Bill Bayless:]

Yes, we talk about there's a vibrant pipeline of about 20 to 30 potential transactions in total over the -- in terms of active procurements, recently completed procurements where decisions haven't been made and direct negotiations. So we're in direct negotiations with clients on about just under a half dozen schools that could bring something to fruition in the next six to 18 months. There's 18 active procurements that are out there that we're in the process of responding to. There's another seven that are a little further along in broader initiatives like the UC system question that you brought up. And so a very sold pipeline. As we've always talked about the procurement process of universities, think of it more like the entitlement process on off campus deals. It does take time. Some move at the speed of light, others move at the pace of a snail and a little harder to predict, but we will keep you up to speed quarter by quarter. And as you saw in 2015 when all the sudden a bunch of them popped at once, that you can have a little bit of a law, but then all of the sudden the flood gates can open, bake on windows, university decision making comes into play.

[Ryan Meliker:]

Just lastly you sold a lot of assets this year with this big portfolio set to close in the fourth quarter. How should we look at dispositions for 2017? Do you think you will continue to recycle capital or do you feel like you're at a stage right now where it doesn't make as much sense to sell assets.

[Bill Bayless:]

No, we'll continue to always prune the bottom 2% to 3% of what we think is the slower growth in the portfolio or again, trading out in markets where we may be investing in different assets. So we would continue to think of ourselves always as a capital recycler in the bottom 2% to 3% of the portfolio, including 2017.

[Operator:]

Our next question comes from Gwen Clark with Evercore ISI. Please go ahead.

[Gwen Clark:]

I just have a couple of quick questions. Can you clarify what the same-store NOI would have been in the third quarter assuming the disposition assets were in the number?

[Daniel Perry:]

Yes, it would have been, sorry Gwen, this is Daniel. It would have been 4.4%.

[Gwen Clark:]

And then the second one is I know you are selling a couple Missouri assets. Can you give us an update on how the operations at those communities were during the quarter, particularly if you could address occupancy and rate growth or lack thereof? That would be great.

[Bill Bayless:]

Honestly we're not going to comment on the performance of any of the 19 that are currently under contract out of courtesy to the seller there. We'll wait until those close. Buyer, I'm sorry. Not a courtesy to ourselves. But I will comment on our new asset in Missouri. As William mentioned in his script -- and that's a market again, to talk about the asset or recycling strategy there we're disposing of the drive asset that we have in Missouri that were part of previously larger M&A transactions. And we're developing right across the street from the campus with the new community we're bringing online next fall. That particular asset is already 46% preleased, it's number two in our portfolio right now. We feel very good about our future investment at the University of Missouri.

[Operator:]

[Operator Instructions]. Our next question comes from Tom Lesnick with Capital One Securities. Please go ahead.

[Tom Lesnick:]

Just a couple quick ones, Gwen just asked my one on the assets targeted for sale in 2017. But regarding the prepayment costs associated with the portfolio sale, I was wondering if you could identify that amount and whether that will be included as a one-time item in 4Q?

[Daniel Perry:]

Yes, it will be included as an early extinguishment of debt in 4Q. Don't really want to quote what we think it will be yet, because obviously it's going to move around significantly with movements in treasury rates and where the final quote on that comment, there's some assets that are defeasances, some that are prepayment, yield maintenance. And also you will have an offset against that for the debt premium that will be written off. So we will have a charge for it, it will show up as an early extinguishment of debt, but don't think it's appropriate for us to comment on it yet just because of how much that moves around.

[Tom Lesnick:]

And then one bigger picture question for you, Bill, but you were interviewed as the cover story for Student Housing Business. In the article published yesterday you cited that one of your -- one of the things that keeps you up at night is scalability, particularly with respect to human capital. And just wondering what differentiating things you're doing at ACC to address that?

[Bill Bayless:]

Yes, Tom and I have answered that question the same since we went public in 2004. And I think you can never become complacent and take for granted that at the end of the day you win and perform with people. And American Campus has always been based on having the best team in the business and our future success is predicated on maintaining that. We started a program called Inside Track in 2003. And Inside Track is where we identify the best talent in our Company, starting at the student worker level and then migrating that into your first managerial positions, leasing managers and AGMs and putting them in a mentoring program. We attended our National Managers Conference last week and of the 200 folks that are managers and first-time corporate employees in managerial positions, 91 of them were Inside Track graduates. And so the program has really been the heart and soul of the Company's scalability. Also last year we really hit a pinnacle in that five people were promoted to the ranks of Senior Vice President and joined the 23 other folks in Senior Management that were part of that Inside Track class of 2003 and 2004. And so that is something that has been the backbone of our scalability, that our culture and employee development department continue to focus on and again, something we'll never take for granted and will always be the thing that keeps me up at night for the years to come.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Bayless for any closing remarks.

[Bill Bayless:]

I want to thank you for joining us. Again, I want to echo the sentiments that Jim and I expressed earlier in thanking the team for just excellent operational, financial and leasing results. And we look forward to seeing you all out in NAREIT. We have an investor tour that Ryan has worked on out at ASU, for those of you that want to see firsthand what that ACE partnership has done in helping President Crow realize his vision of making Arizona State University the new American university. I'd also point out in that regard that ASU was just recently named by U.S. News and World Report as America's Most Innovative university. And so we're proud to have been part of his strategic vision and look forward to showing you that in Phoenix.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.